Why do penalties exist? NIB

Transcription

1 Pg Merrill J Fromer Why do penalties exist? NIB Encourage compliance with tax laws and regulations Punish taxpayers when they fail to adhere to tax laws and regulations Punish preparers when they fail to adhere to certain standards Penalties should not be assess in every case in which the IRS makes an adjustment to tax 1

2 Learning Objectives pg Determine the applicability of a penalty 2. Calculate the correct amount of the penalty 3. Explain the defenses to abate penalties 4. Appeal a denial of penalty relief 5. Request relief from an FBAR penalty 6. Recognize and avoid preparer penalties History of Penalties penalty provisions penalty provisions 1989 more than over 140 penalty provisions Majority : accuracy or delinquency related 1989 The Improved penalty Administration and Compliance Tax Act was enacted 1989 Modified the standards for preparers 2

3 IRM 20.1 NIB ( ) Overview This IRM section discusses the purpose of penalties and provides the legal authorities, criteria for relief, and other general information about penalties. This information is for employees who work with penalties when examining returns, collecting taxes, and other compliance activities IRM 20.1 NIB IRM Penalty Handbook, is the primary source of authority for the administration of penalties by the IRS. IRS functions may develop additional guidance or reference materials for their specific functional administrative needs. However, such reference material must receive approval from the Office of Servicewide Penalties (OSP) prior to distribution and must remain consistent with the policies and general procedural requirements set forth in IRM , 3

4 IRM 20.1 NIB This IRM contains exhibits to assist the user in researching penalty issues: Exhibit , Penalty Relief Application Chart Exhibit , Penalty Reason Code Chart Exhibit , Penalty Transaction Codes Exhibit , Penalty Reference Numbers-500 Series Exhibit , Penalty Reference Numbers-600 Series Exhibit , Penalty Reference Numbers-700 Series Exhibit , Table of Abbreviations and Acronyms Exhibit , Dictionary of Key Terms Principles of applying penalties Consistency in application Accuracy in calculations Impartially of assessment Representation appealable and be abated for reasonable cause 4

5 IRC 7502 Timely Filed and Paid pg The return or payment is deposited in the mail in the United States on or before the due date for filing or paying 2. The envelope containing the return or payment is properly addressed 3. The envelope contains sufficient postage for delivery 4. The envelope was deposited with the US Postal Service or a designated private delivery service Failure to File and Pay pg 371 Individual Taxpayers Delinquency represents 69% of all penalties Failure to File 5% each month up to 25% Failure to Pay -.5% up to 25% Failure to Pay 1% after CP 504 up to 25% Combined (limited) to FTF + FTP = 5% Fraudulent Failure to File = 75% (15% per month) 5

6 Leaving the Country pg 371 Not So Fast! IRS can revoke, deny or limit a passport Prevent one from leaving the country More than $50,000 (seriously delinquent debt) and IRS filed tax lien and TP lien hearing has been exhausted or lapsed Waiver of the Delinquency Penalties pg 371 Reasonable cause IRM Reasonable cause is based on all the facts and circumstances in each situation and In the interest of equitable treatment of the taxpayer and effective tax administration 6

7 Reasonable Cause 1. The taxpayer died or suffered a serious illness, or someone in his or her immediate family died or suffered a serious illness. 2. The taxpayer was unavoidably absent. 3. The taxpayer s place of business or business records were destroyed by fire or other casualty Reasonable Cause pg The taxpayer was unable to determine the amount due for reasons beyond the taxpayer s control. 5 The taxpayer s ability to make deposits or payments has been materially impaired by civil disturbances. 6 The taxpayer lacks funds to pay despite the exercise of ordinary business care and prudence 7

8 Estimated Tax pg 373 The taxpayer expects to owe at least $1,000 in tax for 2016, after subtracting any withholding and refundable credits. The taxpayer expects his or her withholding and refundable credits to be less than the smaller of 90% of the tax on the 2016 tax return (66% if at least twothirds of the gross income for 2015 or 2016 is from farming or fishing); or 100% of the tax on the 2015 tax return [for nonfarmers and fisherman, No Estimated Tax pg 374 Some taxpayers do not have to make estimated tax payments if all three of the following conditions are met: 1. The taxpayer had no tax liability for the prior tax year. 2. The taxpayer was a US citizen or resident alien for the whole year. 3. The prior tax year covered a 12-month period. 8

9 Due dates for estimated tax For the Period Due Date January 1 March 31 April 15 April 1- May 31 June 15 June 1 August 31 September 15 September 1 Dec. 31 January of next year Special Rules (NIB) For the prior year Farmers (2/3 gross income from farming) or Fisherman (2/3 gross income from fishing) Only Subject to estimated tax if, they Expect to owe more than $1,000 in tax and Withholding or refundable credit is less than 66% of the current year tax 9

10 This is no Reasonable Cause pg 374 Need additional causations Federally declared disaster area- IRS will issue a memo After age 62 or disabled (in either of the 2 preceding years) and reasonable cause Corporate Taxpayers pg 375 If tax is at least $500 due C-Corporations S-Corporations (tax due) Private Foundations (trust) Tax exempt (tax due) Lesser of 100% of current year or 100% prior year tax liability (if not $0) 10

11 Example 11.2 pg 375 Corporation A 2016 tax due $ no tax (loss) no look back to prior year Estimate tax = 100% of 2016 ($501) Estimated Tax Due Dates pg 375 Calendar Year Corporation April 15 th June 15 th September 15 th December 15 th 11

12 Larger Corporations pg 376 Large corporations are required to pay 100% of the current-year tax Taxable income of at least $1,000,000 (any 3 preceding years) 100% of prior years tax for first payment (not zero) Must be at least applicable % (1/4 of tax) Example 11.3 (2016) pg Corporation B - $400,000 tax 2016 total tax $600,000 ($150K per qtr.) Qtr. # 1 minimum estimated - $100,000 (based on 2015) Qtr. # 2 minimum payment $200,000 12

13 Payroll Tax Deposit Schedule pg 376 Taxpayers follow predetermined schedule Frequency of deposits remain the same Deposits are either monthly or semiweekly New employer assumes tax liability of zero for lookback year Waiver of the Penalty Pg The penalty was computed incorrectly 2. The amount or effective date of estimated tax payments or credits in the taxpayer s account changes. 3 The taxpayer files a superseding return. 4 An administrative or legislative waiver applies. 5 The IRS misapplied a payment or credit, resulting in a penalty, and assertion of the penalty would be against equity and good conscience. 13

14 Failure to Deposit (FTD ET) pg 376 Form 941: Less than $2,500 deposit quarterly $2,500 or more - must use electronic funds transfers See schedule on pg. 377 Penalties for FTD pg % for deposits 1 to 5 days late 2. 5% for deposits 6 to 15 days late 3. 10% for deposits made more than 15 days late (This also applies to amounts paid within 10 days of the date of the first notice requesting payment for the tax due.) 4. 10% for amounts subject to electronic deposit requirements but not deposited using EFTPS and 15% 14

15 Waiver of the FTD penalty pg 376 IRS policy Statement 3-2 Reasonable cause First time-time abatement Accuracy Related Penalties pg 378 IRC 6662 Imposition of accuracy related penalty on underpayments (a) Imposition of penalty - applies to any understatement of tax required to be shown on a return (b)portion of understatement to which section applies (7 items for which the penalty applies) 15

16 Accuracy related penalties pg A reportable transactions (20%) reportable & listed transactions (30%) Full list of reportable transactions see IRS.gov IRC 6662 penalty relief pg 379 Substantial authority Good faith Reasonable cause Reliance on my preparer Industry practice IRS advice Misinterpretation 16

17 Proving the penalty pg 379 Once recommended, the taxpayer has the burden of proof that the penalty does not apply This is not an impossible task Most correspondence exams automatically assert the penalty Many TCO s and RA s are a bit more flexible Generally applied to entire deficiency but IRC 6663 Civil Fraud Penalty pg 379 Under I.R.C. 6663(a), if any underpayment of tax is due to fraud, a penalty is imposed equal to 75% of the portion of the underpayment due to fraud. Generally applies to entire return unless the taxpayer can prove otherwise Government has burden of proof for fraud 17

18 What is Fraud NIB Not defined in the IRC Tax Court cases state, Fraud is the intentional commission of an act or acts for the specific purpose of evading a tax believed to be owing. Fraud implies bad faith, intentional wrongdoing, and a sinister motive. IRM NIB Definition of Fraud - Deception by misrepresentation of material facts or silence when good faith requires expression, resulting in material damage. Tax fraud requires both: - Tax due and owing - Fraudulent Intent 18

19 Burden of Proof NIB Government bears the burden of proving the fraudulent understatement/underpayment of tax Fraud is not assumed Proof is established with evidence gathered and documented by the examiner - Documents - Testimony of TP or 3 rd parties Levels of Proof NIB Reasonable Doubt (Criminal Fraud) Clear and Convincing Evidence (Civil Fraud) Preponderance of Evidence (Exam) % 19

20 Elements of Tax Fraud Three elements are present in ALL fraud cases: An understatement of tax liability Willful intent to evade taxes A course of action demonstrating the taxpayer s intent (fraud indicators and affirmative acts) Concealment/Deception/Misrepresentation Pattern of Multiple Periods WHAT IS WILLFULNESS? NIB Per courts: voluntary, intentional violation of a known legal duty Willfulness is a state of mind usually proven by circumstantial evidence (affirmative indicators and acts) Willfulness is not a good faith misunderstanding of the law, negligence, carelessness, or mistake 20

21 Fraud INDICATORS What are some EXAMPLES: Concealment of bank accounts/assets False statements or documents * False receipts or sales invoices * False entries or alterations Withholding records, procrastination... your suspicions that tax was intentionally omitted. Taxpayer Conduct Irregularities False statements and false documents Misleading Attempts to hinder the examination Failure to follow accountant s advice Sophistication of taxpayer and obvious errors Attempts to bribe the agent 21

22 End results differ between Civil and Criminal Civil Fraud results in additional tax and assertion of 75% penalty. (IRC 6663) Fraudulent Failure to File is also a 75% penalty. (IRC 6651(f)) Criminal Fraud results in additional tax, fines, penalties and imprisonment. Criminal prosecution punishes the taxpayer and serves as a deterrent to others. Erroneous Claim for Refund or Credit Penalty pg 380 IRC Small Business and Work Opportunity Tax Act of 2007 Penalty = 20% of the excess amount that exceeds the allowed amount Does not apply to EITC No reasonable cause relief 22

23 Information Reporting Penalties Pg 380 IRC 6721 timely file & IRC 6722 furnishing Failure to file Failure to file timely Using incorrect media/format Missing or incorrect information Form W-2 Form 1099 Form 1098 Information Reporting Penalties Pg 382 Penalty is tiered (per document) $50 up to $185,000 if filed within 30 days $100 up to $529,500 if filed after 30 days $260 up to $1,059,500 if filed after Aug. 1 Fine limits are based on small businesses 23

24 IRM Penalty Defenses 1. Reasonable cause 2. Statutory exceptions 3. Administrative waivers 4. Correction of IRS error Pg 384 Reasonable Cause pg 384 Facts and circumstances Good faith Without willful neglect Ordinary business care Generally requires Events outside the taxpayer s control Undue hardship 24

25 Penalty Abatement Request pg 384 Request must be in writing May use Form 843 Include facts and circumstances Prior and subsequent compliance IRS will use the Reasonable Cause Assistant (RCA) 25

26 Reasonable Cause Assistant RCA pg 387 Consistent and equitable administration IRS employee enters necessary data Instant determination If denied appeal process is provided 26

27 Statutory Exceptions pg 387 Each exception is referenced to an IRM section FTF Partnership Return IRM Overview This IRM section covers additions to tax and penalties for failure to file certain returns or to pay tax. FTF 1065 Penalty Relief Pg ( ) Penalty Relief If the taxpayer provides information that will allow penalty relief for failure to file a complete or timely return, abate the penalty (as applicable) using Transaction Code (TC) 161 or TC 241. Use the appropriate Penalty Reason Code (PRC) with the abatement. 27

28 Statutory Exceptions Erroneous Advice Must be in writing to taxpayer Specific to taxpayer written request Relief only applies to the penalty not tax FTP penalties can have a domino effect 1. As a result of a late deposit 2. As a result of a missing deposit Administrative Waivers pg 388 Automatic penalty relief in designated circumstances Failure by IRS to issue guidance Delay by IRS in providing tax forms IRS may issue policy notice under specific circumstances regarding a waiver 28

29 First Time Abatement pg 388 Failure To File Failure To Pay Failure To Deposit Single tax period only IRS looks back 3 yrs - at filing/paying history Taxpayer can request other waivers for other years Does not apply to Form 706, 709, 1120-S Figure 11.6 pg

30 Figure 11.6 pg 390 Appealing a declined request pg 390 Appeals is independent from all other functions Mission settle tax disputes & avoid a trials Annually resolve over 100,000 cases Three online self-help tools: 1. Penalty relief denial 2. Rejected offer in compromise 3. Rejected innocent spouse relief 30

31 International Penalties pg 391 6,000,000 US citizens live and work abroad Most have foreign bank accounts Many own businesses and personal property Many are required financial disclosure Forms Some do.. Foreign matching program (like Form 1099) International Penalties pg 391 Foreign Bank Account Report (FBAR), FinCEN Form 114 Civil and criminal penalties under Title 31 Non-willful FBAR penalty - civil Willful FBAR penalty - civil Criminal penalties 31

32 International Penalties pg 391 Nonwillful FBAR - $10,000 per violation Willful FBAR greater of $100,000 or 50% of account balance Penalties are based on per account Plus any T-26 penalties (income tax) Penalty Relief pg Willful FBAR none Nonwillful reasonable cause Taxpayer must establish lack of intent Generally reported all income from account(s) Voluntary Compliance Program penalties may be reduced or eliminated 32

33 Penalty Mitigation Guidelines pg

34 Failure to File pg 393 Form 8938 specific foreign financial assets Form 3520 transactions with foreign trusts & gifts Form 3520A foreign trust wt. U.S. owner Form 5471 foreign corporation (officer, director, S/H) Form % foreign owned U.S. corporation engaged in a U.S. trade or business (report transactions between foreign owned domestic corp. or a foreign corp. Engaged in a business in the U.S. Preparer Penalties pg 395 Stop fraudulent preparers Stop unscrupulous preparers Stop incompetent preparers 34

35 Disclosure Penalties pg 395 IRC Knowingly or recklessly disclose or use (criminal) IRC Disclose or use tax return information (civil) Who is a Tax Preparer? Pg 395 Any person or Any business who Employs 1 or more persons For compensation Entire or substantial portion of a return Signed or Not (ghost preparer) 35

36 Tax Return Information pg 395 All information collected Form taxpayer or third party Used or Not Intentional or Not Unreasonable Position pg 395 Return or Claim for refund Unreasonable position No substantial position What is a reasonable basis High standard not just arguable (more likely than not) Greater of $1,000 or 50% of fee 36

37 Willful or Reckless pg 396 Understatement Reckless conduct is a highly unreasonable omission or misrepresentation involving an extreme departure from the standards of ordinary care that a practitioner should observe under the circumstances. Lack of any due diligence Could be intentional disregard Example 11.5 Expenses pg 396 Jill gave her preparer Vickie the following Check register Contained both business and personal items Included domestic help (identified as personal in check register) Vickie claimed the deduction Did Jill know? does it matter? 37

38 Example 11.5 (additional facts) Same check register Vickie (preparer) overstates expenses Return is examined by the IRS Vickie is subject to the penalty under I.R.C. 6694(b) In real life Jill is hit with the 20% negligence penalty Penalty Relief pg 396 Prepares blame the client. Clients blames the taxpayer. How does the IRS determine who is at fault TP can provide documents (check register) Preparer client told me. Generally IRS will assess the 20% accuracy penalty 38

39 Preparer Programs NIB PAC audits could start from the preparer coordinator (based on stats) PAC audits could starts with request from the field (FTA) EITC due diligence audits Due Diligence injunctions IRC 6700 penalties See ACA chapter ACA Penalties 39